Final answer:
The Surety mitigates the risk of default by evaluating the borrower's character, capability, and collateral before sanctioning a loan.
Step-by-step explanation:
The Surety attempts to avoid default by investigating the principal with regard to character, capability, and collateral. In the financial capital market, prior to sanctioning a loan, financial institutions assess various factors to offset the risk of imperfect information. They assess the borrower's character through credit history, capability by evaluating income sources and financial stability, and collateral as a form of secured asset that can be seized in the event the loan is not repaid.